The tight monetary policy unleashed by the Reserve Bank of India (RBI) over the past several months may not have made any difference to the surging double digit inflation thus far, but it has certainly started biting the banking industry.

However, prominent bankers, policy makers, capital market players and experts seem to be clear that despite the challenges, there?s enough power in the sector to tide over the present challenges.

This view has also been echoed by Pawan Kumar Bansal, minister of state for finance, and several other panelists at the FE Round Table Conference on ?Banking: The New Reality?. Experts are unanimous that though the emerging situation is tough particularly in the short term , the banking industry can fight out the challenging situation with the right kind of strategies.

Says Naina Lal Kidwai, group general manager and CEO, HSBC India, ?Today, financial closure of any big project with good rates is a big issue. I see this situation prevailing till March 2009. After that we have to review the situation afresh. The issue is, how long will high inflation continue.?? The corporates are facing a crunch in raising long-term resources as the ECB route stands shut, she observed.

She expects that in the near term, retail defaults would have to go up. It is not always that one is unable to pay, there are people who can pay but don?t pay their dues because of the environment. ?Some sense has to prevail and the banks and financial institutions should ensure that information on defaults exist and there are more viable ways of making people pay,? she suggests.

Striking a note of caution, Bansal is of the opinion that the banks should not create a situation where the credit card business brews trouble for them.

?In the credit card business, one bank is prepared to take over the loan of another bank knowing very well that the person has not been able to repay the loan to the original bank. How would he be able to pay much bigger loans afterwards??? he questions.

Describing the current high interest rate situation as a matter of compulsion to check runaway inflation, which is more driven by external factors, Bansal says, ?I remember while making amendments to the banking laws earlier for the stipulation of the cash reserve ratio (CRR), we used to think a day will come when we will be able to bring CRR down to zero. But RBI has been raising it to curb inflation. Today it is at 9%.??

MV Nair, chairman and managing director of the state-owned Union Bank of India, feels the public sector banks need to undertake some internal restructuring in these volatile and uncertain times.

Says Nair: ?This is a time to introspect and restructure the banks? traditional growth areas. Banks need to cut costs to protect their balance sheets and provide cheaper credit to SMEs and the priority sector of the economy. This is difficult but possible. Right now we are talking about difficulties faced in this particular area and growth slowing down to 8% from 9.4%. But I am sure we will enjoy high growth for next two decades.?

Nair adds that public sector banks might have lost 10% market share after the entry of new generation private sector banks, but they have changed fundamentally in every parameter including non performing assets, profitability and efficiency ratios.

?We are functioning in a high competition atmosphere and the current situation, where banks are facing pressures on their balance sheets, only create a conducive atmosphere for consolidation,?? he observes. Nair?s bank was, till recently, talked of as a prime candidate for a merger with another leading public sector bank.

Bankers are doing some plainspeak too. Elaborating on the course of action for private banks, Rana Kapoor, managing director, Yes Bank says: ?I think private sector banks have a red flag, a huge red flag, because they have to be extremely cautious. The time has come where prudence must be exercised by the banking industry. At the same time, we should also fund industries and infrastructure, upgrade the systems. That is the business that requires skills. At the end of the day, what we need most in retail is a good financial solution. We need a deposit solution but don?t need aggressive lending as aggressive lending has already been spoilt a lot in the market. We just can?t take this for granted as has been the practice in the past.??

As the banks grapple with these challenges, the stock market has been keenly watching their performance. Of late, bank stocks have been hammered in the markets as they are seen as a proxy for the economy.

Explaining the current banking scenario from the investors? point of view Rashesh Shah, chairman, Edelweiss Group, says: ?I think investors always link the banking sector with economic growth and when the economy is slowing down because of the measures to tackle inflation along with fiscal slippages, it will have an impact on the banking sector. I think accretion of retail NPAs is also part of the process. Once inflation starts declining, I think our confidence will come back.??

Shah also points out that the market is carefully studying how banks face the resource-raising challenge in these times, and tackle the competition they are facing from mutual funds and insurance companies which are also targeting household sector savings

But it?s not all gloom, argues Meera Sanyal, head, India operations, at ABN Amro Bank. Says Sanyal: ?We are realizing that the current disturbing scenario is certainly a short-term phenomenon and actually, from the infrastructure point of view, there are positive trends. We have seen execution of good projects. There are cash flows in these projects. With the use of technology, the traditional way of mobilising resources is changing and is becoming easier and convenient.?

From an expert point of view, there are clear dos and don?ts which banks have to follow in these tough times.

Viren Mehta, partner, financial services, Ernst and Young says, ?No doubt, the banks? balance sheets is under pressure and they have to find innovative ways to face the situation. There is a need for cheaper resources for the banks and with the help of technology they can penetrate the rural areas for accessing the lower cost deposits.??

However, Mehta says there?s little clarity on consolidation among public sector banks. Consolidation has to be undertaken carefully, he says.

?There are certain issues that have to be addressed to facilitate consolidation among the public sector banks. Unless we are able to redeploy the excess man power, it would be difficult to opt for any kind of consolidation,?? he points out.

Summing up, Kapoor says the current situation might be different, but there are no structural issues facing banks.

?There are challenges and these will take 6-9 months to subside. But structurally, India an un-ending story that we all realize. Even if the growth is slowing down to 7-8 %, it still gives a lot of opportunities for banks to penetrate into untapped business. We have to reflect on one thing: economic growth and its benefits have been phenomenal over the last five years. And the benefits to the banking industry would continue to come, he argues. For the moment, Indian banking appears to be caught between despair and hope. Bankers are hoping this state will be a temporary one.